development of a virtual medical product
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Northwell Inc.When Northwell’s Senior Management and Board first gave Claudia the leadership role in thedevelopment of a virtual medical product and service mall with Medichek, a year and a half ago,she was delighted. She and Nathan Daniels (V-P Marketing) had uncovered the opportunity,Medichek was an excellent organization, and it had been clear that this was a venture well worthembracing. Claudia Leung, CFO of Northwell, had an excellent working relationship with seniormanagement at Medichek. Since Northwell’s major contribution in the shorter term would becash ($7.5 million as of now), she was the ideal candidate for the assignment. The developmentof this initiative would increase her entrepreneurial skill set and profile and looked to be amanageable addition to her portfolio of responsibilities.Claudia was beginning to wonder if this dream assignment was about to become a nightmare.The project had run into technical problems, was 4 to 5 months behind schedule, and the Boardand Senior Management at Northwell were frustrated and putting pressure on Claudia to getthings moving. Executives at Medichek were pushing back, in response to their own frustration,stating that Claudia’s interventions were hindering progress. In addition, she’d been hearinggrowing rumblings of concern and unhappiness in the sales and marketing areas, evidenced inthe recent resignation of three staff members and the loss of a good distributor from the midwest U.S.Northwell’s Senior Management and Board Chair had asked Claudia to recommend a course ofaction that would rectify problems with this undertaking. They were expecting this advice to betabled within the next two weeks.History of the FirmNorthwell Medical was founded 25 years ago, as the result of a merger between a Canadian andUS firm. Northern Medical, the Canadian partner, had specialized in durable hospital/medicalproducts, while Wellness Medical had focused on consumable hospital products. Both haddistributed their products in Canada and the U.S. for a decade prior to the merger, and hadshared marketing and distribution services for five years.The actual merger announcement was anticipated and welcomed by most shareholders andmanagers. There were some initial difficulties as structures, systems, processes, roles, andreporting relationships were sorted out during the first year. By year three the merger wasviewed by both insiders and outsiders as a success. Market penetration and sales acceleratedwhile average costs declined (after accounting for one-time restructuring costs). Growth ratesaveraged 20% (discounting for inflation) throughout the next fifteen years in what was a fairlymature market. Northwell made aggressive investments in technology and product developmentduring this period. Profitability grew at rates 10% above industry norms, with the return onequity averaging 18% during this period. This growth was partially stimulated by the addition ofnew and/or improved products, but it was largely due to Northwell’s spreading reputation forvalue, service and support. They won market share from competitors, even though their pricestructure was typically 2% to 10% higher.As consolidation occurred in the hospital and nursing care delivery systems, it was clear thatNorthwell was well positioned to solidify its position as a preferred supplier amongst purchasing† This case was prepared by Professor Anthony Atkinson of the University of Waterloo andProfessor Gene Deszca of Wilfrid Laurier University. Copyright © G. Deszca and A. Atkinsonagents, administrators and hospital user groups. In U.S. industry surveys of hospital suppliers,Northwell regularly placed in the top 5 for quality, service, support, and overall customersatisfaction during the two decades that followed.Northwell Medical produced a wide range of medical products for institutional usage. Productsranged from consumable patient supplies such as wound dressings, bandages, and disposablesurgical supplies to more durable products (e.g., IV units, walkers, canes). In addition to theproducts it produced, Northwell used its sales network to distribute high quality, higher marginproducts, sourced largely from European and smaller North American specialty manufacturers.Ten years ago these accounted for 10% of the products listed, 15% of sales and 6% of theprofits, and by the most recent year end they represented 10% of products listed, 15% of salesand 25% of profits. These products included hospital beds, wheel chairs, and orthopedicsupports (braces for limbs and neck). The intent was to provide purchasing agents and theirtherapeutic committees with one stop shopping for their medical product needs in particularproduct categories.Northwell’s production facilities were located in the US, Canada, and Mexico. The Canadian plantspecialized in products that involve metal fabrication (approximately 20% of total manufacturedproducts, 25% of sales and 30% of profits in the most recent year end), while the two US plantsmanufactured both plastic and fabric related product (40% of manufactured products, 30% ofsales, and 15% of profits). The Mexican plant also produced plastic and fabric related products(20% of manufactured products listed, 15% of sales, and 10% of profits). In addition, Northwellsourced manufacturing services for some of its products in the Asia-Pacific area (10% ofmanufactured products listed, 10% of sales, 15% of profits).In North America, Northwell marketed and sold its products primarily through its own sales force.In addition, a number of medical product distribution companies carried some or all of theNorthwell line. They were prequalified by Northwell and tended to service smaller hospitals andnursing homes, medical and dental offices, and regional medical product retail supply outlets.The prequalification checks included financial stability, reputation, and service quality. Thoseselected, committed to agreed-to minimum sales volumes. Distributors were not given exclusiveterritories, but over the years they had sorted themselves out in ways that meant that mostAmerican markets were well serviced. These independent distributors accounted for 25% ofsales and approximately 30% of the profits. Wholesale prices allowed for dealer margins thatvaried from 15% to 30%, depending upon the type of product and the complexity involved inselling and servicing the product (e.g., in-service hospital staff training in product use).Over the years certain managers and board members had expressed interest in extending theiractivities into foreign markets (Europe and Japan were the ones most frequently mentioned).However, Northwell had shied away from these opportunities, due to concerns over their abilityto compete and the belief that there were more profitable growth opportunities available in NorthAmerica. Throughout the years, at the request of specific European firms they trusted, Northwellhad engaged in the export of a limited range of relatively unique products. For the most recentyear end, these accounted for approximately 5% of sales and 5% of the profits.Growth and profitability slowed at Northwell nine years ago and flattened thereafter. A year ago,sales growth was 4%, profitability had fallen to 6% of sales and the return on equity was 6.5%.Their reputation as a benchmark to be emulated in the medical products sector was now amemory.Two notable new product failures about a decade ago had resulted in staff changes and a newDirector of New Product Development. Since Sales and Marketing were seen as the primaryclients of New Product Development, funding responsibility for R&D shifted to Sales andMarketing eight years ago. The changes succeeded in reducing costs in this area by 33%through more careful screening and approval processes and tighter budget controls. However,within two years of the change, most of the output from New Product Development was in theform of incremental product improvements, and there was limited work underway in the area ofsignificant product innovations. In an effort to increase their productivity, new productdevelopment personnel restricted their direct field involvement with sales personnel and clients.The problem/opportunity finding role was delegated to marketing and sales personnel, who wereexpected to forwarded project and product suggestions to the Product Development ApprovalTeam. The Director of New Product Development chaired this committee, with representationfrom Sales, Marketing, and Finance/Accounting.The percentage of sales coming from products introduced in the previous four years declinedfrom 25% a decade ago to 8% a year ago. Finger pointing had become the order of the day, asfrustration surfaced over the slow pace of innovation. New Product Development staffcomplained about a lack of resources, equipment, and bureaucracy, while Sales and Marketingpersonnel grumbled that Northwell’s reputation as a problem solver and innovator was beingeroded due to the inability of R&D to deliver the right products at the right time and price.Profitability was negatively affected during the past eight years by competitive pressures on priceand customer servicing costs. Northwell was still a preferred supplier, but the emergence ofhealth care cost containment pressures and powerful buying groups had reduced Northwell’scapacity to command a price premium. More importantly, key competitors caught up withNorthwell in the areas of sales, support, and solutions, but were able to do so in innovative waysthat reduced their sales costs (e.g., call centers, logistical streamlining, and electronicallydistributed training support). Sales and servicing costs at Northwell were now approximately15% higher than their key competitors. However, customers did not perceive significantdifferences in the levels of support and responsiveness.Exhibit 1 summarizes the financial results and performance over the last 4 years.02004006008001,0001,2001,4001,6001,800DollarsYearNorthwell Medical
Revenue 1,680 1,500 1,440 1,382Costofgoodssold 941 840 778 719Gross margin 739 660 662 664Selling and administrative costs 569 570 561 553
Profit 170 90 101 111Most RecentYear End (YE)Previous Year(YE-1) YE-2 YE-3The Medichek OpportunityTwo years ago Northwell’s Senior Management Team received clear feedback that stockholderswere very dissatisfied with cost containment and market expansion activities. At that time, theBoard replaced the Vice Presidents of Sales and Manufacturing (the President was replaced in ayear earlier). All 3 appointments were from outside the organization – something unheard of inthe past. In addition, the Board instituted performance contracts with members of the SeniorManagement Team. These performance contracts required the following improvements to beachieved within a four year period: sales growth of 30% over levels in the most recent year; areturn on equity of 18%; a return to gross profitability levels that exceeded industry averages by10%; 15% of sales coming from products introduced in the previous 4 years; and a return ofcustomer satisfaction levels to those achieved a decade earlier.Nathan Daniels, the V-P Marketing and Claudia Leung, the CFO, had grown up in the Northwelland both had the trust and respect of the new CEO and the Board Chair. Both were appointed totheir senior roles three years ago, following the early retirement of their predecessors.Approximately 2 year ago the CEO gave them joint responsibility for identifying growthopportunities. Nathan and Claudia had bumped heads in the past over the value of marketingexpenditures, but they recognized the assignment’s importance and decided to set aside pastdifficulties. Both possessed a strong interest in emerging information technologies and thisquickly led them to investigate Web-based marketing, distribution, and E-commerce opportunitiesfor Northwell.Research conducted three years ago, told Northwell that their primary customers were eithercurrently able to order and receive information over the Internet or soon would be Internetenabled. Sales personnel reported that an increasing amount of their customer communicationswas being conducted over the Internet and that Northwell’s capacities in this area were laggingbehind their key competitors, as they were in other areas of technologically enabled customersupport. Further, many of these primary customers seemed quite interested in exploiting thistechnology to enhance efficiency, speed, communications, and the efficacy of training anddevelopment. These interests seemed to fit well with the ideas that Nathan and Claudia werepursuing.Shortly after being assigned responsibility for identifying growth opportunities, Nathan andClaudia decided to meet with the senior management of Medichek. Medichek was an emergingnet-based U.S. firm, specializing in health care. They had been founded eight years ago, werelocated in Dallas, were growing very quickly (200+% per year) and had 275 employees.Medichek’s primary business was the design and management of Web sites for a number ofleading health care organizations (hospitals, nursing homes, pharmaceutical manufacturers anddistributors, medical product manufacturers), including Northwell’s (as of approximately 2 yearsago). In addition, three years ago, Medichek launched a subscription service that provided online access to medical information to health care professionals and researchers. This was anexpensive service to develop and maintain, but subscriber growth over the first 18 monthsexceeded Medichek’s expectations by a factor of 2. Medichek had a reputation for innovation,honesty, responsiveness, quality, candidness, and trustworthiness. They were very selective interms of whom they chose to do business with. It was said that Medichek picked its clients andthose who were selected were the lucky ones.Medichek was 75% owned by the five individuals who had founded the company (all were intheir 30’s and directly involved in the business). They had resisted take-over and IPOopportunities, preferring to develop and control their own organization. Nathan first met theMedichek’s owners 3 years ago, when he was looking for a Web-site designer for Northwell.True to form, it was Medichek who, after careful deliberation, selected Northwell as a client.While initially “put off” by Medichek’s approach, Nathan and Claudia quickly became fans, andthis enthusiasm extended to other members of senior management. Their work was fairly pricedby industry standards, but more importantly, their strategic approach to site design andmanagement resulted in customer accolades and industry awards in recent years. Sales andmarketing personnel responded favorably to Northwell’s new website, when it went live,reporting positive customer reactions to its layout, content, and functionality. Though they stillfelt that technology enabled customer support was lagging (e.g., electronic access to technicaltraining support materials), they viewed this as an important step in the right direction.Medichek’s owners and employees often commented about how comfortable they felt workingwith Northwell. They particularly appreciated Northwell’s commitment to dealing with its clientsin ways that emphasized customer knowledge, value, and informed decision-making. Medichekofficials complained that Northwell’s decision-making sometimes took too long, that Northwellover-attended to cost rather than value, and that Northwell had difficulty keeping its “fingers outof the pot” once decisions were made. However, they discounted these frustrations, chalkingthem up to Northwell’s concern for quality and competitiveness.During the development of Nothwell’s website, it became apparent to Claudia and Nathan thatthere might be good reason to get closer to Medichek concerning another venture they werepursuing. Medichek had been exploring the development of a virtual health service mall, for useby the health care industry. The idea was that professional end users (hospitals, nursing homes,physicians, pharmacists) could access this site in order to electronically shop for the productsthey needed. Products and services supplying firms would be carefully screened to ensure thatthey met quality, value and customer service standards. Quotes could be solicited, ordersplaced, and payments received electronically. Further, the mall would serve as a primary sourceof product information, product warnings and recalls, educational on-line health care forums,health care news, and distributed web-based training in health care matters (e.g., product useeducation).From the initial meeting on the virtual mall approximately two years ago, Medichek was clear thatit wanted to partner with Northwell in the development of this undertaking. They proposed thatthe mall be established as an independent business unit and that Northwell and Medichek own itequally. Northwell would commit to becoming a prime occupant in the mall and would supply theneeded development funds (estimated at $5 to $10 million). Medichek would develop thenecessary technology platforms, structure the services and pricing arrangements with malloccupants, structure the entry criteria, and market the mall service. Medichek’s reputation wouldprove very helpful here. They estimated that it would take a year to make this project a reality.Nathan and Claudia were excited by this opportunity. It had the potential to significantly reducecosts for both customers and suppliers and provide Northwell with opportunity to dramaticallyextend its reach into foreign markets. Though quality competitor products would also be listed atthe mall, these were already readily available in the marketplace. More importantly, the mallwould be selective concerning who was allowed to be listed and exhibit. When combined withthe quality of the information, news and other services available, it was anticipated that therewould be a very positive halo cast on firms allowed to market their goods and services at thesite.When Nathan and Claudia talked to Northwell’s IT group and the CEO about this opportunity,interest and excitement spread. Sales and marketing personnel also expressed interested, butwere concerned with the implications on existing channels of distribution and customer contact.This was a company that had built its reputation on its personal relationships with its distributorsand customer (i.e., responsiveness and support), and they were concerned with how thingswould be affected by this new venture. Nathan and Claudia asked them to relax and give thenew venture time to develop. They told staff that the new venture would increase the exposureand reach of Northwell, thereby opening up new opportunities. Channels would not changeovernight, and staff was advised that Northwell would monitor things closely and help employeesadapt and transition into new roles, as needed. They were told that this was new territory foreveryone, so the keys were to be patient and open-minded, communicating information,questions, and concerns in a timely fashion.Claudia worked with the Medichek’s CFO to develop the business plan, projections and a Letter ofUnderstanding during April a year ago. Northwell’s Board was first informed of the possibleopportunity in January a year ago. In May, Northwell’s senior management team recommendedthe partnership (as set out in the Letter of Understanding), to its Board. Medichek and Northwelljointly signed the Letter of Understanding in June a year ago, with the first $2 million installmentof development support issued in June. Northwell’s managers were shocked (pleasantly) by thespeed of the approval process. Primary responsibility for managing the relationship withMedichek was assigned to Claudia.During the latter half of the previous year Medichek hired additional staff and proceeded with thedevelopment work. By February of the current year Northwell had advanced $4.5 million indevelopment support. During this period Northwell had focused on shoring up it internaloperations and improving its profitability. By December of the previous year, products introducedwithin the past 4 years had grown to 9% of sales, and growth had increased 12% over previousyear. Profitability had improved to 10% of sales and an 8% return on equity, and customersatisfaction results had improved marginally. Both the Board and the Senior Management Teamwere pleased to see progress, but felt there was still a long way to go. Discussion amongst thesegroups clearly indicated that they saw the virtual mall as the initiative with the greatest potential,as well as the greatest risks.Personnel in sales and marketing expressed increasing concern over how their functions androles would be affected by the new venture and what would be the impact on their customers.Nathan continued to tell them to relax while they were waiting to see how roles and functionswould need to adapt in the wake of the virtual mall. Though he couldn’t guarantee there wouldbe no job losses, he truly believed this new venture would open up significant new opportunitiesand more meaningful customer relationships for many. In spite of these words of reassurance,the number of voluntary resignations in these areas rose by 15% and there were rumours thatothers were looking as well. Many of these resignations involved individuals viewed as highperformers. In addition, some distributors were also expressing concern and looking foralternative lines of business to represent, in the event that they became redundant to Northwell.Human resources advised the executive to slow its recruiting initiatives for departing personneluntil the effects of the new venture were better understood. Nathan and other senior managersin sales and marketing saw the wisdom in this advice, but they were also concerned aboutsending the wrong message to staff, customers and distributors. As a result, recruitment wasslowed, positions were left unfilled for longer than in the past (150 days on average vs 60), andcontract employees were brought in to help, where needed. The consideration of a new callcenter was also put on the back burner until the ramifications for Nothwell of the virtual mallwere better understood.By April the Senior Management Team was placing increasing pressure on Claudia to get the mallup and running. Marketing of the mall was going extremely well. Product and service suppliershad been solicited and screened and a critical mass of these organizations was signed and readyto go (i.e., their initial product information, visual material, and related systems and supportswere developed). The news and related information services and site features had beendeveloped, staffed and beta tested by those who would be using the mall. Primary customerswere anxiously awaiting access to the new service. However, Medichek reported that thedevelopment of the technological platform and related supports (in particular, the E-commerceand security components) were proving more difficult than originally anticipated and that thecomplete Mall’s formal launch was about 4 months behind schedule.Claudia began to spend more time monitoring the pace of developments at Medichek. Monthlyvisits became weekly. In May she requested bi-weekly reports on progress achieved, fundsexpended, and the time allocations of the various project teams. These were very similar to thereporting Northwell required from its own operations.Relations with Medichek chilled in response to the increased frequency of site visits and therequest for more detailed reporting. At first they resisted complying with the reporting request,but after a month of mounting pressure they acquiesced. Medichek’s senior management wrotethat such information would be furnished under duress, because it would serve no usefulpurpose, be expensive and time consuming to develop, and divert attention from where it wasmost needed.The resignation of three more capable staff members from the sales and marketing area and theloss of a valued distributor from the mid-west U.S. in the late spring elevated Nathan’s anxietyover progress and he wanted to know just how much longer it would be before “VirtualNorthwell” would be fully operational. Nathan continued to believe that it would be unwise tomake major changes in sales and marketing until they really knew how customers would react tothe new channel. He felt that it was difficult to predict, with any degree of certainty, what theideal approach to sales and marketing should be, and he preferred to adopt an approach thatreacted to what evolved as a result of the new channel. However, he was also aware of theneed to address employee and distributor uncertainty as quickly as possible, recognizing that the“be patient until we have a better understanding” strategy was not working well. Since Claudiawas in change of the new venture and since there would be organizational design, budget andcontrol implications, he wanted Claudia’s advice on how best to handle the matter.When Medichek reported continuing development problems in July, Senior Management atNorthwell voiced increasing dissatisfaction with the progress to date and asked Claudia torecommend a course of action that would rectify matters.Questions for Class Discussion1. What are the management and strategic issues that Northwell face?2. What are the opportunities, costs, benefits, and strategic implications of developing theInternet site?3. What decision would you make here and how would you implement your choice?
development of a virtual medical product .
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